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I love structuring my trades using options. I use a number of advanced options strategies to control my risk. One of the simpler strategies I use is to sell puts naked on lower-priced stocks. I do this on small-cap stocks that I don’t think will go much lower. You see, the beauty with selling puts is, the stock doesn’t even need to go up for me to have a great trade. So long as the stock stays sideways, the trade will work due to time decay or Theta. I recently made a great trade in SPHERE 3D CORP (ANY) by selling puts that expired worthless, leaving me with all the premium!

Time Decay or Theta is a very important concept when it comes to trading options, and this knowledge can give traders an extra quiver in their trading arsenal.

Theta

An option’s price is made up of intrinsic value and time (extrinsic) value. The closer an option gets to its expiration date, the faster that extrinsic value erodes. That rate of decay is the option’s Theta. It represents the amount of time value that will be lost the next day.

The closer the option gets to expiration, the bigger Theta gets. And, this increase happens at an exponential rate. Here’s an example of how Theta might erode an option’s time value.

And, here’s what that would look like when plotted on a graph.

Now, whenever you buy an option (call or put), your position has a negative Theta. On the other hand, when you sell premium (call or put) you have a positive Theta. For an option buyer, Theta works against you, and for the option seller, Theta works in your favor.

Three critical aspects I analyze before making a trade are price, volume, and time. Most beginners only focus on price, which is one-dimensional. Adding the concept of time adds a third dimension to how a trader can view markets. This added dimension is even more important when trading options. 

The Smart Money

The market makers selling options are considered the “smart money.” They make a living selling options to retail speculators. Although selling options might seem risky at first, being an options seller has an added benefit. And that is Theta. You see, as Theta decays the options seller receives this premium, it is like collecting rent. Every day that the stock stays below that particular strike, the price of the options will decay due to Theta, and the options seller will be in a stronger position. The option seller benefits from the passage of time, not only price. 

By selling options, I can benefit not just from the movement in price but also the passage of time, just like the market makers. 

One of my favorite trading strategies is selling puts on lower-priced stocks. It takes advantage of the market’s tendency to move up for longer than it moves down and allows me to be right on a trade even if the price of a stock doesn’t move higher when I think it is likely to do so. 

On higher-priced stocks, I usually sell spreads to control my risk. So I would sell one put option close to the money and buy a put option further out of the money. This protects me from unexpected drops in the price of a stock and from outsized losses. However, on lower-priced stocks that I like, I sell puts naked. My risk is defined in that the lowest the stock can go to is 0, and these events are rare. I do extensive research to make sure this is unlikely to happen, but I am a big boy and understand sometimes I will have to take a big hit if something unexpected happens. I am willing to take this extra risk so that I am able to get the added returns by selling puts naked over selling spreads. 

The Fundamentals

 In June, Sphere 3D Corp. (NASDAQ: ANY) entered into an Agreement and Plan of Merger with Gryphon Digital Mining, Inc. (“Gryphon”), a privately-held company focused on the mining of bitcoin using renewable energy. Upon completion of the merger, the Company will change its name to Gryphon Digital Mining, Inc. Given the recent strength in bitcoin and cryptocurrencies as well as the focus on renewable energy, I liked the company’s fundamentals in the short term. It was also a popular social media stock that I felt people would support so long as bitcoin held steady. Moreover, I really liked the chart.

The Technicals

Daily Chart of ANY, I entered the trade on September  20th highlighted by arrow

I’d been stalking ANY for a while. In early September, the stock ran to over $10 but could not hold above. It had started to consolidate with resistance at $7.50 and support at the $5.50-$5.70 area. I liked the stock, and the story, so I was waiting patiently for a pullback into support before taking a position. Patience and great entries are key, so when ANY touched $5.50 and bounced off the 30-day moving average (MA) I entered the trade.

The Trade

I sold 100 of the $5 puts expiring October 15th for 63cents on September 20th. So long as ANY traded above $5 over the following few weeks, I would pocket $6,300 on October 15th, and this would be mostly due to Theta. I thought that this was a very high probability trade in that $5.50 was a great support level, and I thought it was unlikely that ANY would go much below $5 in this time period. Those options expired at 0 so I pocketed all of the $6,300 premium I had received, as ANY closed at $8 on Friday. 

Bottom Line

One of the simpler strategies I use is to sell puts naked on lower-priced stocks. I do this on small-cap stocks that I don’t think will go much lower. By selling options, I can benefit not just from the movement in price but also the passage of time, just like the smart-money market makers. On lower-priced stocks, I am willing to take the extra risk so that I am able to get added returns by selling puts naked over selling spreads. The lowest a stock can go to is 0, which is unlikely and one I am willing to take over the long term. A great example of this strategy was my trade in ANY which worked to a T!

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Back on August 28th, I brought three Uranium stocks to your attention because of the “explosive” upside potential that existed at the time.

Just one day later, the explosion began.

Cameco (CCJ), Denison Mines (DNN), and Uranium Energy Corp.(UEC) are just three stocks within an industry that may be poised for a massive move over the months and, quite possibly, years ahead.

Recently, after a brief correction during the second half of September, the sector has seen another price surge, which, for traders like myself who don’t like to chase trades, makes it difficult to find the right spot to buy.

Look, the stock market has been crazy in recent years, with numerous stocks constructing lasting rallies that defy logic.

Therefore, we can’t ignore the possibility that this sector may have already left the station for good.

With this potential scenario on the table, today I am going to show you two ways to approach this sector.

One way will cater to patient traders like myself, while the other will cater to more aggressive momentum traders.  

The long-term case for Uranium is strong

The recent global energy crisis has once again brought nuclear power as an efficient alternative to unreliable “green” energy to the attention of traders around the world.

After years of stagnant prices, a recent surge in the cost of nuclear fuel, uranium, has helped attract investors back to the sector, especially with France, Finland, and Japan recently hinting at making preparations to restart their nuclear power plants.

The jump in natural gas and coal prices to fresh highs this month has also worsened things in Europe and China.

Here’s how a momentum trader can approach this sector

When you’re fortunate enough to hitch on to a good momentum trade, that old adage, “the trend is your friend” becomes something to live by.

Momentum traders believe that these trends, whether up or down, will continue to head in the same direction because of the momentum that is already behind them.

When a momentum trade has truly gone “beast mode,” as my partner Jason Bond likes to say, there’s basically no stopping it, and any pullbacks that might happen as the trade is developing are often too small to notice.

Trust me when I tell you that in real time, when a winning momentum trade is producing exponential growth in your PnL, emotion can often get the best of you, leading you to trim too large a position too early. 

By using the stock’s volatility to construct a trailing stop, however, you can ride this glorious “beast mode” phase for all it’s worth. 

So how is this done?

The method I’d like to introduce you to today is something called an ATR-based volatility stop.

ATR-based trading plans are hugely popular.

As a trailing stop method during periods when a momentum trade has gone parabolic, it can be used to signal when a pullback has gone too far for the trader to feel comfortable that there is still enough panic buying interest to keep a parabolic rally going uninterrupted. 

If you think about the math here, a 1x ATR price move is within the realm of normalcy for whatever lookback period you’ve put in your ATR settings. 

How is the ATR stop calculated during a trend?

As Figures 1 – 3 below show, when a stock is trending higher, the indicator is simply calculated by subtracting the ATR from the most recent closing price.

If the price happens to close lower, but not low enough to trigger a reversal below the trailing stop, the indicator never falls, it simply remains at the highest level obtained during the active uptrend.

Only when the price falls far enough (a > 1 ATR decline) and closes below this stop will the indicator switch from bull trend mode to bear trend mode.

Putting the ATR into practice

Remember, during parabolic rallies, when panic buying is so great that traders are literally climbing over each other to buy shares, there’s often very little in the way of downside price action.

So, if you think about it, to see a stock fall more than 1 ATR during this phase means that the panic buying is starting to dry up.

While a short-term trend breakdown signal is only given when the stock closes below these stops, some traders do use intra-day violations of this stop as a signal to take small profits.

Figures 1-3 below show examples of this, where we see Moderna has been rising this stop higher in recent weeks.

Figure 1

Figure 2

Figure 3

Volatility is an extremely versatile tool, and simple volatility tools like this one are at the core of many black box trading systems.

What I’ve shown you today is a method used to keep traders in what is now the most aggressive part of a momentum trend.

When this short-term trend following method signals that the parabolic short-term trend has broken down, it is not uncommon for price to take a breath before resuming its uptrend at a decelerated pace.

How can you add this tool to Tradingview and thinkorswim charts?

As Figure 4 shows, within Tradingview, select the Indicators tab at the top of the chart, then type in “volatility stop,” then select volatility stop from the dropdown menu.

Figure 4

As Figure 5 shows, within thinkorswim, select the Studies tab at the top of the chart, then All Studies, then A-C, then ATRTrailinStop.

Figure 5

Like any trading tool, be sure to read the details regarding how your trading and charting platforms construct this indicator, since the default multiplier typically is NOT a 1x multiplier (it’s often a 2x multiplier) and will need to be changed to fit the method discussed here today.

How should more patient traders approach this sector?

For patient traders who prefer not to chase rallies, there is certainly no shortage of strategies that can be used to enter long positions during price pullbacks.

No matter which strategy you use, whether it be waiting for a retest of a recent breakout area or buying after a certain Fibonacci retracement has occurred, it’s often good practice to find an area on the chart that is made up of more than one support level.

An example of this is shown on Figures 6 – 8, where I would be interested in entering a longer-term buy and hold position if either of these stocks happened to pull back to support that is made up of the 30-day moving average and the Anchored VWAP originated at the most recent cycle lows.

Figure 6

Figure 7

Figure 8

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Jeff Bishop’s portfolio is a service where I trade lower-priced stocks. While I do like to trade higher-priced tech stocks with significant liquidity in Total Alpha, I have other trading setups in my quiver that I use to trade small-cap stocks.

One recent trade was in OCUGEN INC (OCGN)OCGN has been in play this year because of its partnership with Indian drugmaker Bharat Biotech on commercializing a Covid-19 vaccine in the United States.

…..Understanding that WHO approval was probably close and having seen a base form, I took a position in the company a few weeks ago, on September 27 to be exact. This week the stock exploded, and whilst I took profits a little bit early, I was in at great prices that resulted in a great trade!

Ocugen, Inc (OCGN) is a clinical-stage biopharmaceutical company that is focused on developing gene therapies. It was a lowly minnow penny stock trading at less than 50c until it partnered with Indian drugmaker Bharat Biotech. Bharat Biotech developed a Covid 19 vaccine known as Covaxin. Ocugen partnered with Bharat on commercializing the vaccine in the U.S and Canada.

The Fundamentals

Being a voracious reader, I understood that WHO approval was possibly not far away for Covaxin. 10% of all doses administered in India with almost 100, 000, 000 of the 970,000,000 million doses were Covaxin.

The vaccine also proved to be pretty effective against variants such as Delta. Now in the United States, Covaxin might have too much competition from the likes of Moderna, Johnson and Johnson, and Pfizer but I felt that the upcoming news catalyst could be enough to see the stock trade significantly higher.

Why would positive developments for Covaxin in India and potentially with the WHO help Ocugen? I thought that some investors might think those regulatory wins could improve the chances that the vaccine secured Emergency Use Authorization (EUA) in Canada and eventual approval in the U.S.

Moreover, OCGN has a short float of 27.38%, according to Finviz, and is a known Meme stock, meaning that positive news could see a flood of retail buying, and we know from previous meme stocks that they can run. So we had an upcoming positive news catalyst, a huge short float, and an effective vaccine that was being administered.

When I make a trade, a moving average crossover is not enough for me to take a position. I need to like the fundamentals, understand the company and have a reason for the stock to see increased demand to push it higher.  OCGN had all of the above and a great technical setup as well.

The Technicals

OCGN had made a nice base from the $6.50 to $7.50 area. It had shown support since February, and the stock was making a flagpole pattern. It was getting tighter and tighter and had been consolidating for months. Now the general rule is, the longer a stock consolidates, the bigger the possible breakout. The old adage is the bigger the base, the bigger the space. Thus if the stock had good news, I knew it could have an explosive breakout based on the chart pattern, and it did.

The Trade

As you can see from my trading journal above, on September 27 I bought 5000 shares of OCGN at a price of $7.49. Any significant selloff below $6.50 and I would be out of the trade, but I planned to hold the stock into the upcoming news catalyst. I would sell into a breakout above $8 and into $9, looking to ride some for as long as I could.

On October 5 I got lucky pre-market and got filled on 3000 shares at $9. That is a good lesson on why I always set my orders with “GTC + extended hours”. You can see some crazy moves in pre-market and will get filled once in a while.

The major move happened this week, with OCGN receiving two pieces of good news. On Tuesday, India gave Emergency Use Authorization (EUA) to COVID-19 vaccine Covaxin for children ages two to 18. The next day, India’s NDTV reported that the vaccine was likely to soon receive a green light from the World Health Organization, according to inside sources.

I expected the stock to gap up and run on the news on Tuesday. Instead, it sold off into the open. Thinking it might be a sell-the-news event, I decided to get out of my position to lock in some profits. That ended up being a dumb move, as I basically sold the bottom at $8.05. Over the next 4 days, the stock ran to over $10 without me. It was a bit annoying, but that’s trading. I had a great trade Idea, kind of butchered it, but was still able to make a $5.6k profit.

Bottom Line

Jeff Bishop’s portfolio is a service where I trade lower-priced stocks.

When I make a trade, a moving average crossover is not enough for me to take a position. I need to like the fundamentals, understand the company and have a reason for the stock to see increased demand to push it higher.  

OCGN had all of the above and a great technical setup as well. I was able to enter the trade at great prices, and exit some of my position before the news catalyst hit and the rest after a news catalyst came out. Despite messing up the trade a little bit, getting in at great prices meant I was still able to make a great trade.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.